Here's a checklist to help you decide if refinancing is right for you and how to do it the right way.
When it comes to refinancing your home loan, “refinancing” simply means taking out a new loan to pay out your current mortgage.
There are a whole range of reasons why you may want to change loan providers some of which include: if your circumstances have changed, or you've had your home loan for a few years then refinancing could offer you the chance to take advantage of more flexible features. Refinancing can also enable you to use your home equity to invest, consolidate debt or access cash to fund expenses such as education costs or renovations.
Wanting a lower interest rate and lower repayments is a common reason to refinance as even a slight decrease in the interest rate can make a major difference to your repayments and the length of time to repay your loan. But just chasing a lower interest rate isn’t enough to make refinancing a wise idea.
On quick glance, refinancing might seem like a good idea but it is important to investigate the suitable solution for you. It pays to do your research and ‘look before you leap’ to understand that whether you’re not losing any features or benefits, or ending up paying more in fees and charges than you are gaining in a lower interest rate.
Refinancing Can Make Sense When:
• There is a major change to your personal financial situation (such as marriage, divorce, a new job)
• You want to switch to a fixed interest rate
• You have accumulated higher-interest debt such as credit cards and personal loans which you want to consolidate to a lower interest rate
• If your lender isn’t as competitive as other lenders in the market and you feel that you are paying too much interest
• You would like to access home equity to invest, purchase a new property, fund home renovations or fund large expense such as kid’s schooling costs.
Refinancing Might Not Make Sense When:
• There are significant penalties or early repayment fees applying to your existing home loan.
• You’re planning on selling the property in the next few years.
• You have a low loan balance and don’t plan on redrawing any of the available equity.
• You have a fluctuating or unstable income.
• Your personal financial situation has changed since you first applied or if your credit history means that you’re not likely to get a good rate.
If you decide that refinancing is right for you follow a process to get it right.
The process to refinance is fairly simple – with five key steps:
1. Do your own research or use a Mortgage Broker to find the loan that's suitable for your needs.
2. Apply to the new lender. In addition to the usual loan application documents and evidence of employment, income, assets and liabilities, you’re also likely to need to provide the new lender with statements for the last six months of any existing home loans or personal loans and the most recent rates notice and building insurance policy on your property.
3. Once your new loan has been approved, you or your solicitor advises your current lender that your mortgage will be 'discharged' or paid out. Once the exact date of settlement, you'll be given a final payout figure.
4. The new lender pays off the outstanding loan and the title deeds to your property will be transferred to your new lender.
5. On settlement, your new lender will lodge a document called a Discharge of Mortgage with the Land Titles Office in your State or Territory.
What’s most important is that you do your homework so that you can make an informed decision on whether refinancing is beneficial for you. If in doubt, seek professional advice as there can be significant penalties, fees and tax consequences that you may not be aware of.
Segue's team can help you assess your financial position and the best steps to take for your financial future. Ask us how.
Accurate as at: Jun 30, 2015